Donald Trump stole the show once again last week, as he fired FBI Director James Comey, causing a huge backlash and another round of Russian-related accusations from his opposition. The announcement triggered a small sell-off on Wall Street, even after the favorable result of the French Presidential election. Tech stocks, led by Apple (AAPL), pulled their weight once again, pushing the Nasdaq to yet another all-time high, despite the weakness in the other major benchmarks. Although the “narrowing” of the rally might be worrisome, especially given the lackluster performance of small caps lately, stocks are still showing resilience to economic and political shocks.
The most watched economic reports delivered a blow once again after a promising week, as the CPI index and retail sales both missed expectations for the second month in a row. While the numbers are still showing expansion, the slowing growth might spell trouble for the consumer segment, especially the “brick-and-mortar” retailers, which have been under pressure in recent months. The Fed usually pays close attention to consumption trends, and sure enough rate hike odds took a hit after the weak reports, even as the U of M Consumer Sentiment Index came in above the consensus estimate. Treasury yields were drifting higher since mid-April, but Friday’s dip might signal a meaningful correction in the trend.
Technicals deteriorated somewhat, as the major indices continued to diverge last week, and while the overall picture is still strongly bullish, some caution might be necessary. The Nasdaq is in the best shape without a doubt, with the benchmark being well above its rising short-and long-term moving averages. The Dow and the S&P 500 seem to be losing short-term momentum, as the 50-day moving averages are flattening, although the indices are still holding up above both indicators. The Russell 2000 failed to escape the gravity of the short-term average yet again. It closed the week right at the key indicator, following another negative period for small caps. The Volatility Index (VIX) fell below the 10 level on Monday, but spiked above 11 toward the end of the week, as sentiment turned gloomier.
Market internals are still sending mixed signals, in line with the performance of the major indices, as the lagging small caps continue to weigh on the broader measures. The Advance/Decline line stayed flat for the second week in a row, even as advancing issues slightly outnumbered declining stocks by a 3-to-2 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined again on both exchanges, falling to 113 on the NYSE, and 144 on the Nasdaq. The number of new lows showed some improvement, dropping to 32 on the NYSE, while edging higher to 63 on the Nasdaq. The ratio of stocks above their 200-day moving average was virtually unchanged at 65% during the week, despite the rebound in the energy sector, and it remains a major concern for bulls.
Short interest is still at historically depressed levels, as the easing of the European political worries removed another “tail risk” factor from the equation. Shake Shack (SHAK) showed encouraging strength after its earnings report last week, rallying by more than 10% and possibly causing headaches for bears, with short interest standing at 43%. The bid wars for Straight Path (STRP) seem to have ended for good, after an incredible 400% surge, but the short interest of 40% suggests immense pain for bears. Century Link (CTL) is still near the top of the list with the highest days-to-cover ratio (DTC), with a reading of 11, even as the stock recovered well after a disappointing quarterly report. Wine giant Brown-Forman (BF-B) also sports a DTC ratio of 11, while the stock has been rising steadily since mid-April, possibly pointing to an ongoing short squeeze.
With no major economic releases coming out this week, traders might be in for a summer-like period, especially if volatility remains as low as it has been lately. That said, the Gorilla will pay close attention to stocks, as usual, as eventless times are great for judging the underlying strength of the market. Of course, with Donald Trump in the White House, things could get interesting at any time, but so far the market has shrugged off everything that the POTUS or the economy has thrown at it. Although Wall Street ended last week on a slightly negative note, investors still have a robust bullish trend to rely on, and the Gorilla sees no indication that this will change anytime soon. Stay tuned for a promising week!